Question

Community Bank recently introduced a new bonus plan for its business unit executives. The company believes that current profitability and customer satisfaction levels are equally important to the bank's long-term success. As a result, the new plan awards a bonus equal to 1% of salary for each 1% increase in net income or 1% increase in the company's customer satisfaction index. For example, increasing net income from $3 million to $3.3 million (or 10% from its initial value) leads to a bonus of 10% of salary, while increasing the bank's customer satisfaction index from 70 to 73.5 (or 5% from its initial value) leads to a bonus of 5% of salary. There is no bonus penalty when net income or customer satisfaction declines. In 2012 and 2013, Community Bank's three business units reported the following performance results:
REQUIRED
1. Compute the bonus as a percent of salary earned by each business unit executive in 2013.
2. What factors might explain the different improvement rates for net income and customer satisfaction in the three units?
3. Community Bank's board of directors is concerned that the 2013 bonus awards may not actually reflect the executives' overall performance. In particular, it is concerned that executives can earn large bonuses by doing well on one performance dimension but under per forming on the other. What changes can it make to the bonus plan to prevent this from happening in the future? Explain briefly.


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  • CreatedJuly 31, 2015
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